Every university student who has struggled over their calculus homework has two renowned historical figures to thank (or curse). But that was not always the case. Isaac Newton is likely the most acclaimed intellectual in history. His accomplishments are both legendary and the stuff of shear genius. But like any of us he was not without flaws. A somewhat jealous contemporary Robert Hooke had the propensity to be overly critical of the sensitive, insecure Newton. As a result, one of Newton’s early inventions, calculus went unpublished for nearly two decades. By the time Newton did publish the Principia in 1687; Gottfried Leibniz had independently developed and published his own work on calculus a decade before. This eventually touched off the Calculus Wars between the two learned men. Fueled by their pride, vanity and a circle of friends to stoke their egos the feud lasted until the two men died. While Newton won acclaim and celebrity during his lifetime, the dispute over the rightful ownership of calculus sadly left Leibniz to die in near obscurity. Fortunately history has been much kinder to Leibniz and restored his rightful place as a brilliant mathematician, philosopher and the co-inventor of calculus.
The anniversary of the Flash Crash is a reminder of the bubbling and brewing tension between regulators and market practitioners. While there is an altruistic goal of making our markets fair and equitable for everyone, there is a delicate balance that exists between those two camps. The Flash Crash was an ugly reminder of the complex interdependent structure in our markets, not only between futures and equities where the crash reared up but also on a global scale as well. U.S. firms trade and hedge on European and Asian markets like it was in their back yard. Regulators, in a “do no harm” Hippocratic oath-style mentality have to realize that drastic new rules could upset the balance as much as the crash itself. I would like to think Mary Schapiro, chairperson of the SEC recognizes this, her talk at a SIFMA seminar talks of disruptive rules.
On the other side of the equation are the market practitioners, while many are well established and gearing up for regulation’s long arm, there are new spin-off firms entering the fray as a result of Dodd-Frank’s Volcker rule on proprietary trading. Most of the trade journal articles have focused on the capital raising issues these new firms face but there are equally as many technology challenges on the road ahead. The star traders behind these new firms now have to grapple with a multitude of infrastructure concerns that they previously left in the capable hands of IT staff at the banks they left behind.
I’ve occasionally heard the phrase “we’ve hired a rocket scientist” in conversation with a few of these new firms. This “rocket man” is typically a young energetic mathematician with excellent software development skills. But they often lack the savvy and wisdom to lead a technology strategy. Knowing the right blend of build vs. buy for technology decisions is as big a key to success as the profitability of the deployed strategies. Those techno-wizards often have that NIH attitude; their decisions devote costly development time and energy into infrastructure-related technology. I’ve often heard the performance argument; an in-house built system will have the lowest latency. For that model the good news is “you own it all“, the bad news is “you own it all“. There is a huge risk of getting distracted from the primary goal of capital management to software development when you own it all. You will own the maintenance, management, upgrades and integration headaches. You’ll have to keep pace with new regulations, maintain interfaces with market data and trading vendor feeds, wrestle with historical data storage concerns. It’s an endless list.
I have always been a proponent of platform technology. The key characteristics of platforms is that they offer the ‘iltiies’ or a set of core functional capabilities that are required “must-haves”. That includes scalability, reliability/availability, maintainability/configurability/administration, security/entitlements, personalization/usability and of course performance. Everyone needs these ilities, but priorities can be different from firm to firm. If you’re deploying an ATS for example, taking in client order flow, then system availability/redundancy is vitally important to meet SLA requirements. Any platform vendor choices you make should have this as a prominent feature.
Moving higher up, there is a set of solutions-focused criteria all firms innately recognize are vitally important in the trade life cycle:
- Alpha Discovery and Research
- Strategy Development with rapid evolution and debugging
- Strategy Backtesting with optimization and simulation
- Strategy Deployment with compliance, risk monitoring and Portfolio and VaR Management
- Post-Deployment, regulation concerns and transaction cost analysis
For a sound technology strategy it is important to recognize the summation of these life cycle criteria with those essential characteristics or ‘ilities I described above. Such as strategy affords a focus on the most critical aspects of capital management, including quickly responding to new regulations.
It is sad that Newton and Leibniz, two brilliant minds of the seventeenth century to which we owe much today could not resolve the calculus conflict in their lifetime, it was not an incalculable adversity to overcome. As regulators continue to press-on in response to the Flash Crash, cooperation will ensure we don’t end this saga in a like manner.
Once again thanks for reading.
For an occasional opinion or commentary on technology in Capital Markets you can follow me on twitter, here.